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3 Sports Stocks to Buy in May

By Will Ebiefung – May 28, 2020 at 6:30AM

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Several sports seasons have been canceled because of the coronavirus -- but these three sports stocks are still poised for a bull run.

This year has been a rough year for sports fans. The coronavirus pandemic has interrupted the seasons for pro sports leagues like the NFL, NHL, NBA, and MLB, as well as many college and amateur sports, and millions of fans have been left craving a return to live, full-contact competition.

Despite this severe disruption in the sports world, there are some sports-focused companies that are still operating (and thriving) in this pandemic. One such company is Nike (NKE 2.50%), a multinational sports footwear and apparel maker set to benefit from easing coronavirus lockdowns in Asia. Two others, DraftKings (DKNG 3.65%) and Penn National Gaming (PENN 5.39%), are bets on the future of the still-nascent but rapidly growing sports betting industry. All three companies are poised to survive the crisis and offer market-beating returns to investors.

Here a bit more on why these three sports stocks might be worth buying in May.

A baseball and a baseball glove and American currency.

Image source: Getty Images.

1. Nike

Nike may not be directly involved in sports, but it is a huge player in the industry through sponsorships, equipment sales, and licensing deals. The company generates the majority of its revenue through global footwear sales. While this consumer discretionary business does face challenges related to the coronavirus pandemic, Nike's strong balance sheet and rock-solid brand ensure that it can weather the crisis relatively unscathed.

Nike reported third-quarter fiscal 2020 earnings on March 24, and the results were impressive. Total revenue grew 10% from $9.61 billion to $10.10 billion, driven by strong sales in North America and the EMEA region which represents Europe, the Middle East, and Africa. However, Nike's Chinese sales declined in the quarter (which ended on Feb. 29) because the coronavirus was mainly confined to China in that period.

Nike's fourth quarter will show the full effect of the pandemic outside China. But expect Chinese sales to recover sharply because the company recently announced the reopening of 100% of its company-owned stores and 95% of its partner stores in China and South Korea. This will help offset the downside in other regions in the fourth quarter, possibly leading to a better-than-expected result. Nike is also reopening stores in Europe and North America as the pandemic winds down in these regions.

Nike reports around $3.18 billion in cash and short-term investments compared to just $3.46 billion in long-term debt on its balance sheet, making the company a very safe bet in these uncertain economic times.

2. DraftKings

DraftKings is an exciting sports betting company that came into being in April 2020 through a reverse merger with a blank check acquisition company called Diamond Acquisition Corp., a specially designed investment vehicle that allowed it to go public without the hassle of a traditional IPO. The company combines DraftKings, a leading sports betting brand, with SBTech, a provider of betting technology services.

The rollup is highly synergistic and should give the combined company an edge over competitors because it is now the only virtually integrated pure-play sports betting platform in the U.S. 

DraftKings stock has performed well this year, with shares soaring around 228% year-to-date. And the company is poised for continued success because it boasts robust revenue growth and has adapted to coronavirus-related challenges in the sports industry. First-quarter revenue grew by 30% from $68.09 million to $88.54 million, despite the coronavirus pandemic. Revenue from the core DraftKings sports betting platform was pacing at 60% growth before the coronavirus hit.

DraftKings is limiting the coronavirus effect by creating new content to keep players engaged while traditional sports are suspended. The company has launched several new esports betting options, including eNASCAR, Counterstrike, and Rocket League, as well as betting options on traditional sports like Table Tennis and Korean Basketball. These new options will not only keep players betting during the pandemic, but they will also drive long-term growth after the crisis is over.

DraftKings is a growth company, and despite its rapid revenue growth, it isn't profitable yet. Management estimates cash burn of between $15 million to $20 million per month while major sports are suspended. But the company is in a good position to weather this challenge because it reports over $450 million in cash and equivalents on its balance sheet and zero debt.

3. Penn National Gaming 

Penn National Gaming is a diversified gaming company that operates casino and horse racing facilities along with a burgeoning sports betting platform in the U.S. Unlike DraftKings, Penn isn't a pure-play on the sports betting industry, but it does offer substantial exposure to the fast-growing market through its acquisition of Barstool Sports, a sports culture blog with a massive millennial audience.

In February, Penn invested $163 million in Barstool Sports in return for a 36% equity position. This comes with an agreement to step up ownership to a 50% stake in three years and exercisable options that could lead to full ownership down the line.

Barstool Sports will exclusively promote Penn's products and casinos for up to 40 years. Penn will also get access to data from Barstool's highly targeted 66 million monthly unique users. Management expects this deal to boost Penn's sports betting business and reduce customer acquisition costs, helping the company compete with rivals like DraftKings and FanDuel.

Penn National faced some challenges due to the coronavirus pandemic in the first quarter. Revenue fell 12.5% from $1.28 billion to $1.12 billion, while total operating expenses increased from $1.1 billion to $1.68 billion, leading to an operating loss of $560 million against a profit of $182 million in the prior-year period. But the good news is that Penn is bouncing back from the coronavirus -- reopening multiple casinos in the U.S. as government lockdowns wind down.

The company also has significant liquidity, with $730.7 million in cash reported in the first quarter along with a recent $250 million public offering of shares and $250 million in convertible debt due in 2026.

Will Ebiefung has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
$98.70 (2.50%) $2.41
Penn National Gaming, Inc. Stock Quote
Penn National Gaming, Inc.
$27.96 (5.39%) $1.43
DraftKings Inc. Stock Quote
DraftKings Inc.
$15.88 (3.65%) $0.56

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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